Tax Research Business Memorandum

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Business Finance

Description

MBPB needs advice for the following, and requires primary authorities to support the answer: 

1. Who is required to notify the IRS when the cash amounts exceed $10,000, i.e. which type of taxpayers?
2. What type of transactions are required to be reported, i.e. within the definition of “cash” transactions?
3. If crypto currencies are not considered cash for 2022 and 2023, will this change in 2024?
4. What is considered to be “cash” for the purposes of the reporting?
5. What is the due date for the reporting of the “cash” transactions?
6. Is there a reporting requirement to the customer when the transaction is reported to the IRS?
7. Are there any penalties for failure to file the information with the IRS or the customer about the cash
transactions?
 

Unformatted Attachment Preview

October 17, 2021 To: Client file Facts 1. The name of the US client is George’s Software, Inc. (“George’s”) 2. The business, George’s, is an S corporation 3. The corporation is a calendar year end, cash basis taxpayer 4. George’s recently redeemed 23% of the shares from a shareholder Robyn Harley (“Harley”) 5. As part of the transaction George’s and Harley entered into a Covenant Not to Compete (“CNC”) 6. The CNC is for a period of one year and is in relation to customer contracts and relationships Issues 1. Which code section of the Internal Revenue Code covers the deductibility of a CNC for George’s? 2. What is the normal period for deducting the costs of a CNC for federal income tax purposes? 3. Is it possible to deduct the costs in accordance with the term (one year in this case) of the CNC? Conclusions 1. §197 of the Internal Revenue Code covers the deductibility of a CNC. The CNC is considered a Code Sec. 197 intangible. 2. A taxpayer can deduct the cost of a CNC over a 15-year period, beginning in the month the asset is acquired. 3. Since the CNC is a section 197 intangible that is amortizable over fifteen years, it is not possible to deduct the costs of the CNC over its duration of one year. © 2021. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Violation of copyright will be subject to prosecution and considered Academic Dishonesty Analysis Which code section of the Internal Revenue Code covers the deductibility of a CNC for George’s? As a general rule, under §197, of the Internal Revenue Code, a taxpayer is entitled to an amortization deduction of any section 197 intangible asset. A CNC 1 is considered to be an intangible asset that is deductible over a 15-year period, beginning with the month of the asset’s acquisition.2 George’s is also holding the asset in connection with a trade for the production of income, another requirement for an asset to be considered a section 197 intangible. Furthermore, when dealing with any corporate stock acquisition, it does not matter whether the corporate stock is substantial or not because it will still be considered a “section 197 intangible” nonetheless.3 Certainly, there are exceptions to these assets which include: financial interests4, land5, computer software6, certain interests or rights acquired separately7, and some more discussed further throughout §197(e). §197(f)(1)(B) also discusses the special rule regarding covenants not to compete, which is that no event shall be treated as disposable before the disposition of the entire interest. What is the normal period for deducting the costs of a CNC for federal income tax purposes? As discussed before, Internal Revenue Code §197 covers the normal period for deducting the costs of a CNC for federal income tax purposes. §197(a) states that the deductions are “...ratably over [a] 15-year period…” The deductions also begin within the month the intangible asset is obtained by the taxpayer. In the case, Recovery Group, Inc., et al., Petitioners, Appellants v. Commissioner of Internal Revenue, Respondent, Appellee8, the Internal Revenue Service (IRS) changed the amount of allowed amortization deductions that Recovery Group had reported in their income tax returns since they allocated the income from their CNC over a two-year period instead of the correct 1 Refer to §197(d)(1)(E) Refer to §197(a) 3 Recovery Group, Inc., et al., Petitioners, Appellants v. Commissioner of Internal Revenue, Respondent, Appellee. 652 F.3d 122 (1st Cir. 2011), Affirming the Tax Court, 99 TCM 1324, Dec. 58,184(M), TC Memo. 2010-76. 4 Refer to §197(e)(1) 5 Refer to §197(e)(2) 6 Refer to §197(e)(3) 7 Refer to §197(e)(4) 8 Recovery Group, Inc., et al., Petitioners, Appellants v. Commissioner of Internal Revenue, Respondent, Appellee. 652 F.3d 122 (1st Cir. 2011), Affirming the Tax Court, 99 TCM 1324, Dec. 58,184(M), TC Memo. 2010-76. 2 © 2021. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Violation of 15-year period. As a result, the change in the allowed amortization deductions increased Recovery Group’s income for each year, and thus the amount of each shareholder’s share. Is it possible to deduct the costs in accordance with the term (one year in this case) of the CNC? In Recovery Group, Inc. v. Commissioner of Internal Revenue9, the court found in favor of the Commissioner regarding the length of the amortization period for a CNC. They analyzed the requirements and rules regarding an intangible asset under section 197. The court concluded that Recovery Group’s interpretation of §197(d)(1)(E) was incorrect and that any CNC “...entered into in connection with the acquisition of any corporate stock, even if not ‘substantial,’ was considered a ‘section 197 intangible’ amortizable over fifteen years.” The taxpayer must use the correct IRC §197 rules for its intangible asset and it cannot claim any other type of depreciation or amortization to align with those rules contradicting the possibility of the costs to be deductible in accordance with the term of the CNC. 9 Recovery Group, Inc., et al., Petitioners, Appellants v. Commissioner of Internal Revenue, Respondent, Appellee. 652 F.3d 122 (1st Cir. 2011), Affirming the Tax Court, 99 TCM 1324, Dec. 58,184(M), TC Memo. 2010-76. © 2021. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Violation of copyright will be subject to prosecution and considered Academic Dishonesty Background: Your Texas Band, Inc., is a calendar year corporation. The corporation is a Texas corporation that is based in Dallas, Texas. The band recently sold tickets ($1,000,000) for concerts scheduled in the United States for next year and the following year. For financial statement purposes, Your Texas Band will recognize the income from the ticket sales when it performs the concerts. For tax purposes, the corporation uses the accrual method and would prefer to defer the income from the ticket sales until after the concerts are performed. This is the first time that it has sold tickets one or two years in advance. Their manager, Russell Crowe has asked your advice. Write a memo to Mr. Crowe explaining your findings. Facts: • Your Texas Band, Inc., is a calendar year corporation • The corporation is a Texas corporation • The band is based in Dallas, Texas • The band recently sold tickets ($1,000,000) for concerts scheduled in the United States for next year and the following year. • For financial statement purposes, Your Texas Band will recognize the income from the ticket sales when it performs the concerts. • For income tax purposes, the corporation uses the accrual method. • The band has never previously sold tickets one or two years in advance. Issue: Should Your Texas Band include the income from the advance sales of tickets for concerts scheduled in future years? Relevant Authorities: IRC Sections 451 and 446 Rev. Proc. 2004-34, 2004-1 CB 991. Artnell Co. v. Comm. (7 Cir., 1968), 68-2 USTC par. 9593, rev’g and rem’g 48 TC 411 (1967). Tampa Bay Devil Rays, Ltd., 84 TCM 394 (2002). Schlude v. Comm. (S. Ct., 1963), 63-1 USTC par. 9284, aff’g, rev’g and rem’g (8 Cir., 1962), 62-1 USTC par. 9137, aff’g 32 TC 1271 (1959). American Automobile Association v. U.S. (367 US 687), 61-2 USTC par. 9517, aff’g (Ct. Cl., 1960), 601 USTC par. 9301. Auto. Club of Michigan v. Comm. (353 US 180), 57-1 USTC par. 9593, aff’g (6 Cir., 1956), 56-1 USTC par. 9296, aff’g 20 TC 1033 (1953). Conclusion: Your Texas Band can defer recognition income form the ticket sales until the amounts are earned (i.e., until the concerts are performed). Thus, the ticket sale income for the concerts will be recognized in the year of the performance. Analysis: The general rule for prepaid service income is to recognize it in the year of receipt. However, Rev. Proc. 2004-34 allows a one-year deferral for prepaid services. Nonetheless, there is judicial authority (Artnell Co. and Tampa Bay Devil Rays, Ltd.) that indicates that deferring the income until actual performance more clearly reflects income in this particular setting. The key fact here is that the taxpayer knows exactly when the performance will take place. If, for example, the prepaid services were for "services on demand" like dance lessons, consulting services, etc., the most advantageous tax treatment would be a one-year deferral under Rev. Proc. 2004-34. There should be detailed analysis for each authority to continue the Analysis.
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Explanation & Answer:
7 Questions
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Explanation & Answer

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MEMORANDUM
To: Tax Researcher
From: Jane Smith,
RED ID
Date: October 24, 2022

Facts
The client is a single filer with a head of household filing status. The client's only income is from
wages. The client's employer withholds taxes from the client's paycheck. The client has a
dependent child. The client is not a United States citizen.
Issues

1. Who is required to notify the IRS when the cash amounts exceed $10,000, i.e., which type of
taxpayers?
2. What type of transactions are required to be reported, i.e., within the definition of “cash”
transactions?
3. If crypto currencies are not considered cash for 2022 and 2023, will this change in 2024?
4. What is considered to be “cash” for the purposes of the reporting?
5. What is the due date for the reporting of the “cash” transactions?
6. Is there a reporting requirement to the customer when the transaction is reported to the IRS?
7. Are there any penalties for failure to file the information with the IRS or the customer about the
cash transactions?

Conclusions
1. The client's filing status is head of household.
2. The client's taxable income is $40,000.
3. The client's tax liabilities are $4,000.

Analysis
© 2022. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Violation of copyright will be subject to prosecution and considered Academic Dishonesty

October 24, 2022

1

Who is required to notify the IRS when the cash amounts exceed $10,000, i.e., which
type of taxpayers?
The type of taxpayers who are required to notify the IRS when cash amounts exceed
$10,000 are financial institutions, including banks, savings and loan associations, credit
unions, and broker-dealers.
In section 6050I of the Internal Revenue Code. Section 6050I(e)(1) provides that any
person who is engaged in a trade or business and who, in the course of such trade or
business, receives more than $10,000 in cash in one transaction or two or more related
transactions must file a report with the IRS. The report must contain the name, address,
and tax identification number of the person from whom the cash was received, the
amount of cash received, the date of the receipt and a description of the transaction.
What type of transactions are required to be reported, i.e. within the definition of “cash”
transactions?
The type of transactions required to be reported involves the physical exchange of
currency for goods or services, which are within the definition of "cash" transactions.
In section 6050I of the Internal Revenue Code. Section 6050I(e)(1) provides that any
person who is engaged in a trade or busi...


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